Question

Discuss the advantages and disadvantages of Exporting and Direct Investment as the two possible modes of entry in international business. Which mode of entry would you favor for a small firm entering a high-risk market?

Answer 1

Advantages of exporting

You could broaden your markets dramatically, leaving you less reliant on any single sector.
Greater production will result in greater economies of scale and better margins.
Your budget for R&D could work harder, as you can change existing products to suit new markets.

Disadvantages of exporting

You can lose focus on your home markets and existing customers unless you're cautious.
When trading outside the European Union, your administration costs may rise as you may have to deal with export regulations.
You will manage more remote relationships, occasionally thousands of miles away.
You may lose some of the control in the overseas markets that you are used to at home.
You'll need to think differently to home market about your new market. They 're going to be different clients with their own reasons to buy your goods.

Advantages of Direct Investment

Inflows of Direct inestment are of a long-term nature and thus do not result in uncertainty on either foreign exchange or stock markets.
Since the investments are in physical assets it is not easy to withdraw these investments immediately, hence there is no withdrawal of fear during times of economic crisis.
Quite frequently foreign debt inflows or loans are used to fund spending leading to problems with debt servicing and increased money supply. In the case of direct investment, these features are not seen, because the funds turn into productive energy.

Disadvantages of Direct Investment

The host country can't control the repatriation, reinvestment and distribution of profits.
Cultural differences between foreign investors and local management can lead to friction as well as adverse social side effects, which is why social regulations must be in place before direct investment is allowed.
Excessive reliance on the foreign entity will lead to a gradual loss of influence over the company.

Exporting is mostly favorable for smaller markets:

Exporting is typically the easiest way to enter an international market and so most companies start their international expansion using this entry model. Exporting is the export of goods and services from home country originating in foreign countries. The benefit of this mode of entry is that businesses escape the expense of setting up operations in the new country. However, businesses must have a way of selling and promoting their goods in the new country which they normally do by contractual arrangements with a local company or distributor. The company must consider labeling, packaging and pricing the offer suitably for the market when it exports.